Personally, I Prefer Clarity on the Social Security ‘Trust Fund’

It is important we stop thinking of the securities in the SS “Trust Fund” as real. Its only meaning is it measures the amount of money the government has already spent from our SS taxes on items not related to Social Security. That is all it is. This number is recorded as an intergovernmental ledger transfer that simply cancels out to zero. It does not exist. Same with the Medicare Trust Fund. The fact that Treasury could theoretically “sell” an intergovernmental transfer is meaningless in an economic sense; in fact it would be simply selling new debt.

Therefore, our “$14 trillion” of debt is actually an overstatement. We really currently owe about “only” $9-10 trillion (unsecured debt that is—not counting our guarantees to Fannie and Freddie). There is no meaningful way an entity can owe money to itself. That extra $5 trillion or so of debt in the “Trust Fund” does not exist — not yet at least. This is why there is still hope. Also, the very large present value numbers we often see presented as our “true debt” (I have seen present value numbers as large as $50-100 trillion depending on how many years out one goes) is also not real — again not yet at least. Rather, these numbers are simply representations of the present value the Federal Government would owe in the future if no changes were made (ignoring unexpected revenue increases due to higher growth and productivity increases) in our current entitlement programs. But we do not owe it now. That is a real and important distinction even as it is a politically difficult nut to crack. In reality, it is far from hopeless.

Language is important. I believe one of the biggest obstacles to change is the general confusion in our political and economic language. People are smart enough to understand all of this, as they deal with these exact issues in their daily lives. Maybe I am stating the obvious, but most people I know easily see the difference between actually owing money and potentially owing money. Lack of precision in our public discourse is a big part of the problem we face. Laws can change. This does not mean the political fight won’t remain intractable for a while, but that is a far cry from being already dead and buried as a country.

But we do have to start soon — like yesterday.

Michael Rulle has worked in the financial services industry for 30 years. He currently manages his own proprietary trading firm, MSR Investments LLC, which specializes in quantitative modeling of markets. He also writes commentary about Political Economy on his weblog, Law of the Bad Premise.

Click here to view the 8 legacy comments

Click here to hide legacy comments

8 Comments, 6 Threads

1.
R C Dean

The fact that Treasury could theoretically “sell” an intergovernmental transfer is meaningless in an economic sense; in fact it would be simply selling new debt.

I believe the bonds held by the entitlement “trust funds” are a special issue that are explicitly and emphatically not transferable. So they would, de jure as well as de facto, have to issue new debt.

Which raises a question on Obama’s threat to cut off SocSec. Why couldn’t any funds necessary to pay SocSec be used to “redeem” those bonds held by SocSec? Even if new debt had to be issued to raise the money, the net effect on outstanding debt would be zero, and wouldn’t bust the debt ceiling, no?

Thanks for the question. What bothers me about accounting gimmicks is the confusion they create (think Enron) even among the most sophisticated analysts at times. The reason gimmicks work their evil is that they are Orwellian. They mean exactly the opposite of what they sound like they mean. If one does not know the actual facts it is impossible to figure this out–(again, ask Enron investors). In the case of the “trust fund”—there is no trust fund in any real way the term is intended to mean.

Having said that you are making an interesting technical point. Some have suggested that if the Treasury could in fact raise new debt in the markets to swap into the so called trust fund, the official debt number of $14 would remain the same. I don’t personally know if this would be permitted, but it certainly sounds plausible.

But my point is the real debt number currently outstanding (not what could be or is likely to be outstanding in the future) is actually overstated and is not $14 trillion but closer to $10 Trillion. So if the Feds raised a trillion dollars, our real current debt would rise from $10 to $11 trillion. Our fake nominal number would stay at $14.

As implied by my article, we are not yet out of time to make things better—and I suggest clarity is one of the best vehicles to use to help fix our problems.

But that “trust fund” is in fact a debt that the US government owes to me; I was forced to “loan” the money to the US government with only a promise by the US Congress that I would eventually get it back when I retire. Now, we’re smart Gen-Xers so our retirement plans don’t involve trusting the US government to ever give us that money back (in other words, we fully expect the US government to default on that debt since they spent our Social Security money a long time ago). But when you take into account the premises under which our Social Security taxes were confiscated from us, that’s what you’re looking at.

Jeanette,
Yes, the Federal Government has been distorting/stealing, or whatever euphemism one wants to use, from the public for 40 years. Technically, it has been a redistribution from all tax payers to some taxpayers– “from the many to the few” might be the most accurate characterization. Of course since all money is fungible it is hard to target exactly who benefits, except the politicians themselves who get contributions from their chosen benefactors. It is a truly corrupt system, which properly jails people when conducted in the private sector. Most charitably, one can characterize it as mere stupidity, but I think it is worse..

Great Comment Mike. One of the ways to look at the use of surplus SS revenues to supplement current obligations of the U.S. Gov’t is that for the past decades the surplus revenue appropriated by the Treasury reduced the amount of Treausry Securitis that would have been issued to fund spending. By using SS surplus revenue the Treasury reduced the amount of actual Treausry Securities created (In lieu of actual securities the Treasury created accounting ledger entries,’faux Orwellian non-marketable securities’ the called ‘Special Gov’t Securities). So, in a way the Treasury issues less actual securities during the surplus years of the SS operations and then pays back this deficit by issuing an increased amount of securities during the benefit years when there is no surplus and obligations have to be funded out of general obligations. Right now we are in the years where the SS revenue surplus is naturally converting to an SS revenue deficit. We spent the money reducing current and accrued debt on the promise that we could easily obtain and afford future debt. We did not consider that when we would need to ramp up borrowing for SS that it might come at an inconvenient time when we were not prepared to ramp up borrowing.

Another interesting nit is that the proceedure with recievinig SS revenue into the general account is to apply the current SS revenue to current SS obligations and then to use whatever surplus is left to fund other current obligaitons of the U.S. Government, issuing these ‘Special Government Security’ ledger entries to mark the intergovernment debt, as you explain above. If you think about it, there is now enough current revenue from SS to fund current obligations..some months are surplus and some a deficit. I don’t think we have started annual deficits yet. This implies that in the event of Debt Ceiling shutdowm of new borrowing, SS would be currently funded and should be uneffected, using its own current revenues to pay its current obligations. The only way that SS checks would not be sent out is if a political decision to not follow current regulations and pay those benefits.

Agree fully. My political opinion is we start cutting immediately, although less in the near future and more in the far future. Bottom line, is when you look at your SS statement on Social Security.gov, it is a good idea to cut it by some percent. We will get less money than we are owed. We need to figure a way to gradually change from a government centric retirement program to a 401k system. We are less rich than we think we are. But we will become richer than we would otherwise become, if we make these changes.

Also, the wild card is economic growth and productivity. But as usual, the instinct of government is to act exactly in the opposite direction that is required.